CHAPTER ONE

INTRODUCTION

1.0 INTRODUCTION
This chapter will discuss the following sections; background, problem statement, Research
objective, general objectives, specific objectives, research questions, scope of the study, Content
Scope, Geographical Scope, Time scope operational definitions significance of the study and
conceptual framework.

1.1 Background
Managing credit risk is a complex multidimensional problem and as a result there are a number
of different approaches in use, some of which are quantitative while others involve qualitative
judgements. (Ken Brown & Peter Moles ,2014). The financial and banking sector serves the
economic function of financial intermediation by ensuring efficient allocation of resources in the
economy. Financial intermediation involves asset liability transformation, size transformation,
maturity transformation and risk transformation. Risk is inherent in the banking business.
(Brahmaiah*, 2021)

In India Credit risk management is a complex process, and it ensures banks identify, assess,
manage, and optimize their credit risk at an individual level or at an entity level or at the
portfolio level. Banks should have sound and efficient credit risk management policies and
procedures which are responsive to the micro and macro-economic changes. The efficiency and
quality of the credit risk management will be the key challenge and driver for the asset quality
and profitability of banks. The primary techniques of credit risk management are creating credit
standards, developing credit scores, analysis of credit worthiness of borrowers, proper risk
rating, adequate collaterals and risk based pricing. Banks should develop and adopt the Risk
Adjusted Return on Capital (RAROC) model to measure the efficiency of the capital and
profitability of banks. Banks are required to follow the cardinal principles of lending, comply
exposure norms and ceilings, follow loan review and renewal mechanism, effective risk scoring
and appropriate rating models, risk-based pricing and credit portfolio exposures diversification.
Credit limits for individual borrower and group should be set in a comparable and meaningful
manner. (Brahmaiah*, 2021) In Sweden credit risk management. It is the ratio of total capital to
1
risk adjusted assets of the bank. The higher the ratio is the indication of adequacy of the bank’s
capital and better assets quality, therefore, low credit risk. This is also an independent variable
and is chosen because it is the core measure of a bank's financial strength from a regulator's point
of view. It consists of the types of financial capital considered the most reliable and liquid,
primarily shareholders' equity. Banks with good Capital Adequacy Ratio have good financial
performance. (Isanzu , The Impact of Credit Risk on the Financial Performance of Chinese
Banks , 2017) credit risk management quality is similar among the used banks. The
nonperforming loan ratio has a maximum value of 4.3 to minimum of 0.85 percent with the
mean and standard deviation 1.45 and 0.72 respectively which indicates there is low volatility
among the ability of banks to manage credit risk. The minimum capital adequacy ratio is 3.86
percent with is lower than regulatory requirement of 10 percent which means there are some
banks which are noncompliance as they have not been reaching the required level of Basel II
standards. The Impaired loan reserve ratio has a minim of 2.05 and a maximum of 4.46 with a
standard deviation of 0.671 which is also low. The Loan impairment charges are very low which
is desirable since it represents the actual loan charge-off, as it is evident with the minimum of
0.29 and a maximum value of 1.2 with a low standard deviation of 0.6 signifying a low variation
among banks. The measure of financial performance ROA has a minimum value of 0.82 and a
maximum of 1.4 with a very low standard deviation of 0.168 which is evident that the
performance among banks is nearly similar (Isanzu , The Impact of Credit Risk on the Financial
Performance of Chinese Banks , 2017)

In credit risk management for banking is vital since banks make a profit from their credit
disbursement. Effective CRM proved to help increase the present and future financial
performance of the bank. The relationship between CRM and Banks profitability was found to be
positive thus effective CRM contributes to Banks financial performance (Isanzu , The Impact of
Credit Risk on the Financial Performance of Chinese Banks , 2017)

In Nigeria, commercial banks play an important role in mobilizing financial resources for
investment by extending credit to various businesses and investors. Lending represents the
heart of the banking industry and loans and advances are the dominant assets as they
generate the largest share of operating income. Loans however expose the banks to the
greatest level of risk. Many banks that collapsed in the late 1990’s and up to the recent

2
restructuring of the commercial banks in Nigeria were as a result of the poor management
of facility which was portrayed in the high levels of non-performing loans. Looking at the
emphasis that is laid on credit risk management by commercial banks in the recent time,
the level of contribution of this factor to financial performance has not been analyzed
which called for this study. Researcher has therefore turned to the study of credit risk
management, which offers natural experiments for the betterment performance assessment of
commercial banks in Nigeria
(Olusegun Adekunle, Samson Alalade & Taofeek Agbatogun, 2015)

In Somalia the extent of vulnerability and crisis vary between Somaliland, Puntland and South
Central (SC) administrative regions. Whereas the SC, the most populated and largest part of
Somalia, remains under threat from radical militants, Somaliland and Puntland have achieved
relative stability and a modest development. More recently, the security situation and
accessibility to Mogadishu and other parts of the southern Somalia improved considerably. The
Somali financial sector is largely unregulated and unsupervised and recently has come under an
unyielding threat of being cut off from the global financial system. Legal and regulatory
weaknesses limit the institutional effectiveness of the central banks to regulate and supervise
financial institutions. Although the authorities in Mogadishu and Hargeisa have enacted central
banking acts and financial institutions laws, the Somali financial sector remains unsupervised.
Informal and unregulated provision of financial services is the norm in Somalia. Some of these
financial institutions also act as quasi-banking institutions facilitating the transfer of funds within
the region, ensuring the transfer of funds for domestic and foreign trade and offering deposit and
credit facilities. For this reason, the formalization approach for Somali financial institutions (that
is, regulation and supervision) will need to be graduated and well-ordered taking into
consideration needs for orderly entry and exist in a formal and regulated business environment
for financial services, including proper unwinding of problematic and unfit activities by financial
institutions. (ARAB, 2018)

So that this research will focus on the investigating of the impact of credit risk management on
bank performance at mogadishu Somalia

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1.2 problem statement
Credit risk causes economic downturn as banks fail due to default risk from clients, which has
had a negative impact on the economic development of many nations around the world. The very
nature of the banking business is so sensitive because more than 85% of their liability is deposits
from depositors Banks use these deposits to generate credit for their borrowers, which in fact is a
revenue generating activity for 8 most banks. This credit creation process exposes the banks to
high default risk which might led to financial distress including bankruptcy. All the same, beside
other services, banks must create credit for their clients to make some money, grow and survive
stiff competition at the market place. (Takang Felix Achou & Ntui Claudine Tenguh , 2008)

Due to unstable and volatile nature of the political and financial environment in Somalia, banks
are affected by many types of risk, including risks to foreign exchange rates, liquidity,
operations, and credit. Somalia’s financial institutions are generally risk-averse, especially
towards car financing and mortgage loans in which chances of huge losses are Balochistan is the
least developed part with largest geographical area in Somalia. There are limited opportunities
for small businesses and majority of businesses are run in informal form with poor
documentation. Majority of commercial banks face problems like loan documents verification
and loan processing. Therefore, the adoption of proper risk management strategies can help
understand and mitigate the credit risk faced by commercial banks (Ur Rehman, Zia;
Muhammad, Noor; Sarwar, Bilal; Raz & Muhammad Asif, 2019) so that there is urgent need to
determine the impact of credit risk management on bank performance of Somalia especially
Amal Bank

1.3 Research objective

1.3.1 General Objective

The general objective of this study will to understand the impact of credit risk management on
bank performance at amal bank in mogadishu.

1.3.2 Specific Objectives

1. To investigate the impact of risk identification on bank performance at amal bank in

mogadishu
2. To determine the risk analysis on bank performance at amal bank in mogadishu

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 3. To examine the risk monitoring on bank performance at amal bank in mogadishu
1.4 RESEARCH QUESTIONS
1. What is the impact of risk identification on bank performance at amal bank in mogadishu
2. What is the role of risk analysis on bank performance at amal bank in Mogadishu
3. What is the impact of risk monitoring on bank performance at amal bank in Mogadishu
1.5 SCOPE OF THE STUDY

1.5.1 Content Scope

Content Scope of this study was focused on to investigate the impact of credit risk management
on bank performance

1.5.3 Time Scope

This study was from April 2024 to June 2024.

1.6 OPERATIONAL DEFINITION

Credit is established when a person borrows money and agrees to pay it back. The money can
be obtained through a bank or other institution, as well as through friends and family.
(gerontology, 2010)

Credit risk the potential that a bank borrower or. counterparty will fail to meet its obligations
in accordance with agreed terms. (management, 2015)

Credit risk management the practice of mitigating losses by assessing borrowers' credit risk –
including payment behavior and affordability. (Insights, 2020)

Risk analysis process of estimating probabilities and expected consequences for identified risks
(Costard, 2008)

Risk identification Is systematic effort to identify and document the Institution's key risks.
(Framework, 2008)

Risk monitoring is the process of. recognizing, examining, studying and scheduling for
emerging risks; (Amine Nehari Talet, Louay Karadsheh,Mufleh Jarrah &Samer Alhawari, 2018)

5
Bank; is a financial institution which collects money in current, savings or fixed deposit account
(Pagett, 2013)

Bank performance is the measuring the market value of the final goods and services produced
by resources (tAriyani Indriastuti & dHarjum Muharam, 2020)

1.7 SIGNIFICANCE OF THE STUDY

The significance of this study was contributed includes the following:

Banks and Financial Institutions: Banks are the primary entities involved in financial transactions
and are susceptible to various types of fraud

Regulatory Authorities: Regulatory authorities, such as central banks and financial regulators,
play a crucial role in ensuring the stability and integrity of the financial system. A study on fraud
prevention in banks can provide valuable insights to regulators in designing and enforcing
appropriate regulations and guidelines to prevent fraudulent activities.

Customers and Depositors: Customers and depositors are the lifeblood of banks. A study
highlighting the importance of fraud prevention in banks can raise awareness among customers
about potential risks and encourage them to choose banks that prioritize robust fraud prevention
measures. This can help customers make informed decisions about where to entrust their funds
and foster confidence in the banking system.

Researchers and Academics: Researchers and academics in the field of finance, banking, and
criminology can benefit from a study on the role of fraud prevention in bank performance. Such
a study can provide a foundation for further research, generate new ideas, and contribute to the
existing body of knowledge in the field. It can also serve as a reference for future studies and
formulating academic curricula related to banking and financial crime prevention.

Government and Law Enforcement Agencies: Governments and law enforcement agencies are
responsible for combating financial crimes, including fraud. A study on fraud prevention in
banks can help these entities understand the various types of fraud, their impact on bank
performance, and the preventive measures that can be implemented. This knowledge can inform
policy decisions, resource allocation, and the development of effective collaboration between
banks and law enforcement agencies in fighting financial fraud.

6
Investors and Shareholders: Investors and shareholders have a vested interest in the financial
performance and stability of banks. A study on the role of fraud prevention on bank performance
can provide insights into the potential impact of fraud on the profitability and value of banks.
This information can assist investors and shareholders in making informed decisions about their
investments and encourage banks to prioritize effective fraud prevention measures to protect
shareholder value.

1.8 Conceptual framework

Figure 1.1 conceptual framework

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 CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION
This chapter will cover the literature review that related to this study and the basic objectives of
the study that include, credit risk management, bank performance , the role of risk analysis on
bank performance, the role of risk identification on bank performance and the role of risk
identification on bank performance

2.1 Credit risk management

Managing credit risk is a fundamental component in the safe and sound management of all
licensed financial institutions. Sound credit risk management involves prudently managing the
risk/reward relationship and controlling and minimizing credit risks across a variety of
dimensions, such as quality, concentration, currency, maturity, security and type of credit facility.
Although the particulars of credit risk management will differ among institutions depending
upon the nature and complexity of their credit functions and portfolios, a comprehensive credit
risk management programme requires: • identifying existing or potential credit risks to which the
institution is exposed in conducting its business activities and developing and implementing
sound and prudent credit policies to effectively manage and control these risks; • developing and
implementing effective credit granting, documentation and collection processes; and •
developing and implementing comprehensive procedures to effectively monitor and control the
nature, characteristics, and quality of the credit portfolio. (Jamaica., 2005)

Credit risk management is at the heart of successful asset finance for three reasons: 1. Provider
financial sustainability. If an organization is unable to manage its credit risk (i.e., it is unable to
turn contractual receivables into actual cash at its expected rate), then it will underperform
financially and struggle to raise debt, eventually becoming illiquid and then insolvent. If this
happens across enough companies then the sector’s risk profile will rise, making capital more
expensive. 2. Customer affordability. If a company is pricing-in expected credit losses (as it

8
should be, see Chapter 3 and Chapter 5), then every customer that defaults on an asset loan/lease
beyond the expected level makes that same asset more expensive for the next group of
customers. If companies can minimize defaults through better assessment, monitoring or
collections, they will be making their assets more affordable (see Box 1 for an example). 3.
Market development. Lowincome households need access to assets. But CGAP’s experience
working with AFCs shows that a failure to manage credit risk can push companies to consider
shifting more of their lending toward higher-income customers and highervalue assets.
Therefore, every time a lender tries and fails to serve low-income clients, they risk making it
harder for those clients to access the things they need. It may be that some people are not
financially (Daniel Waldron, Holger Siek, Max Mattern, and Walter Tukahiirwa, 2021)

2.3 Credit risk management and bank performance

Credit risk management is at the heart of successful asset finance for three reasons: 1. Provider
financial sustainability. If an organization is unable to manage its credit risk (i.e., it is unable to
turn contractual receivables into actual cash at its expected rate), then it will underperform
financially and struggle to raise debt, eventually becoming illiquid and then insolvent. If this
happens across enough companies then the sector’s risk profile will rise, making capital more
expensive. 2. Customer affordability. If a company is pricing-in expected credit losses (as it
should be, see Chapter 3 and Chapter 5), then every customer that defaults on an asset loan/lease
beyond the expected level makes that same asset more expensive for the next group of
customers. If companies can minimize defaults through better assessment, monitoring or
collections, they will be making their assets more affordable (see Box 1 for an example). 3.
Market development. Lowincome households need access to assets. But CGAP’s experience
working with AFCs shows that a failure to manage credit risk can push companies to consider
shifting more of their lending toward higher-income customers and highervalue assets.
Therefore, every time a lender tries and fails to serve low-income clients, they risk making it
harder for those clients to access the things they need. It may be that some people are not
financially (Daniel Waldron, Holger Siek, Max Mattern, and Walter Tukahiirwa, 2021)

Banking supervision, which is based on an ongoing analytical review of banks, continues to be

one of the key factors in maintaining stability and confidence in the financial system. Chapter 15
explores bank supervision arrangements, the supervision process, and the role of supervisors in

9
ensuring that banks operate in a safe and sound manner—that banks understand and adequately
manage risks associated with their operations and that they hold sufficient capital and reserves to
support these risks. The methodology used in an analytical review of banks, during the off-site
surveillance and on-site supervision process, is similar to that of private sector analysts (for
example, external auditors or a bank’s risk managers), except that the ultimate objective of the
analysis is somewhat different. The analytical framework for the risk-based bank analysis
advocated in this publication is therefore universally applicable (Hennie van Greuning&Sonja
Brajovic Bratanovic, 2009).

2.3.1 credit Risk analysis

Risk analysis the process of assessing the likelihood of occurring risk using quantitative and
qualitative analysis method, assessment of the costs and benefits of addressing risk and
analyzing risk includes prioritiz-ing of risk and selecting those that need active management”
(Khalid & Amjad, 2012). Other facets that need considera-tion during risk analysis and
assessment include economical, legal, environmental, and social facets. Active risk analysis and
assessment process help decision-makers in commercial banks set future plans, technically
enabling them to measure, Management Science Letters 10 (2 020) 491prioritize and reduce
risks in an optimal way (Rosman, 2009). For example, risk rating enables top managements to
gauge the intensity of risk. Therefore, banks with such ability may have greater business
performance. (Sleimi, 2020)

Banking supervision, which is based on an ongoing analytical review of banks, continues to be

one of the key factors in maintaining stability and confidence in the financial system. Chapter 15
explores bank supervision arrangements, the supervision process, and the role of supervisors in
ensuring that banks operate in a safe and sound manner—that banks understand and adequately
manage risks associated with their operations and that they hold sufficient capital and reserves to
support these risks. The methodology used in an analytical review of banks, during the off-site
surveillance and on-site supervision process, is similar to that of private sector analysts (for
example, external auditors or a bank’s risk managers), except that the ultimate objective of the
analysis is somewhat different. The analytical framework for the risk-based bank analysis
advocated in this publication is therefore universally applicable (Hennie van Greuning&Sonja
Brajovic Bratanovic, 2009).

10
Risk is a systematic analysis of credit worthiness analysis, client’s characters, capacity, collateral,
capital, and conditions before granting loans, and credit granted to de-faulted clients which must
be reduced”. In other words, it is an assessment of financial authenticity of debtors from bank
perspective. Credit risk is the biggest threat to the banking system solidity where 60% from
banks risks infects banks performance (Bessis, 2011). The aim of credit risk analysis is for banks
to raise their risk adjusted rate of return by avoiding credit risk that’s in turn lowering chances of
default either client’s repayments failure or low banks credit stand-ing whichare involved under
credit risk analysis (Sleimi, 2020)

2.3.2 credit Risk identification

Risk identification is a process of initiating actions; creating awareness, a common view, and
commitments; as well as clarifying expectations. This could be achieved by making risk
identification rules, which attempt to identify specific risks through risk factors. According to
Ayam and Ahinful (2015), risk identification denotes recog-nizing the sources of risks and
activities that are affected by the risk. Scholars studying risk in the banking industry argued that
risk identification is a premiere step in RM execution (Jabnoun & Hassan Al-Tamimi, 2003;
Powers et al., 2007) and useful in controlling and managing risks processes (Tchankova, 2002).
Laycock (2014) proposed two important methods to identify risks namely: (a) Risk mapping -
requires banks’ knowledge of the surrounding types of risks that may affect the performance and
classify them according to the number of occurrence and their strength. Hence, banks try to
evade or avoid high frequency and/or high effect types of risks at the same time as well as risk
mapping assorts risks based on their effect; (b) Analyzing risk - classifies risks according to their
significance which allows management to utilize sources perfectly and to expand with its risk
management plan. (Sleimi, 2020)

The management of risk is such an important concept in project management, that all project
managers should not ignore. Therefore, in project planning, project managers and team should
ensure that more attention is given towards the identification and causes of risks, categories of
risks and possible risks responses. The team should develop a document called risk management
plan, that guides them in the management of [Link] project activities carry some element of
risk, which are uncertainties that could affect the project for better or worse. It is important to
understand the difference between business risks and project risks. Business risks are more

11
general and relate to the organization, whereas project risks relate specifically to the project
objectives. Risks are unexpected happenings that can damage or enhance projects objective. Risk
identification is a challenging process in the management of project risks. Most project managers
tend to spend less time in identifying risks and more time in risk mitigation, ignoring the fact that
unidentified risks cannot be mitigated. However, it is worth noting that risk identification forms
the bedrock in the development of a suitable risk management plan. Once, the risk is identified
proper planning process can be instituted to address it. The identification and management of
risks can be a daunting task that requires the support of all project stakeholders. Moreover, the
project manager does not have monopoly of knowledge and as such requires significant inputs
from other stakeholders especially in identifying project risks. (George, 2020)

Profitability is an indicator of banks’ capacity to carry risk and/or increase their capital. It
indicates banks’ competitiveness and measures the quality of management. Profitability is one of
the key concepts in our research which examines the relationship between the profitability and
credit risk management. The determinants of commercial banks' profitability can be divided into
two categories, namely those that are management controllable (internal determinants) and those
are beyond the control of management (external determinants) (Guru, Staunton, &
Balashanmugam, 1999, p. 3; Kosmidou, Tanna, & Pasiouras, 2005, p. 3). The internal
determinants reflect upon banks' management policy and decision concerning sources and uses
of funds management, capital and liquidity management and expenses management (Ahmadyan,
2017)

2.3.3 credit risk monitoring

“Risk monitoring - “is the process of assessing the level of internal control for the risks that may
face banks and deter-mining the availability of reporting and communication processes that
support the effective management of risk. It entails evaluating of the effectiveness of the existing
controls and RM responses through action plans for implementing decisions about identified
risks” (Khalid & Amjad, 2012). According to Airmic (2002), risk monitoring aims to ensure
that RM implementations are in an ordered manner and helps in error detection. Risk monitoring
is useful for cross-checking the effectiveness of RM system (Pausenberger & Nassauer, 2000),
because the employees are very busy and do not have enough time for serious monitorin
(Sleimi, 2020).

12
n developed countries, various construction organizations have heavily funded KMexecution as a
response to the rising demands of developing their professional prac-tices (Idris et al 2015).
Consequently, most projects take place in a dynamic setting inwhich many downsides may
negatively affect the outcome of the project and its com-pletion (Karadsheh et al 2008).
Therefore, knowledge becomes gradually more impor-tant in terms of managing the enterprise,
which leads to using KM comprehensivelyin enterprise management (Li 2008).RM is an
essential component of any business and is well known by project manage-ment institutes (Del
Cano and Cruz 2002). Further, Roy (2004) presented the conceptof RM for projects focused on
software improvement. Also, RM must be a unifiedcomponent of the project management
structure to be effective. In another study, Chaet al (2008) stated that a combination of RM
processes and business continuity man-agement is very significant for current organizations. In
addition, new managementprocesses have surfaced for the management of modifications, and
numerous author (Amine Nehari Talet, Louay Karadsheh,Mufleh Jarrah &Samer Alhawari,
2018)

The current statuses of those risks are assessed in real time through continuous monitoring of
their relevant Key Risk Indicators (KRIs, IOR, 2010). Third, significant changes are assessed
and recognized in an ongoing manner. 5 Forth, corresponding audit and risk management
procedures are prioritized on an ongoing basis to selectively examine the high audit risk areas
affected by the client’s high risks and related controls, so that the audit risks are reduced and the
client’s high level risks are mitigated. envisage that CRMA would shift CA to a risk based,
dynamic process that promptly deals with the organization’s rapidly changing business and audit
environment. They call for more research on further developing methods and procedures for
CRMA. We view CRMA as a systematic approach to building a continuous risk assessment and
dynamic audit planning process to address business risks and link them to audit and risk
management procedures. Such an approach would not only enable a dynamic, risk based CA
system, but also facilitate the BRA process and improve the auditor’s ability to detect changes in
the client’s business risk profile and their impacts on audit risks in a more real time manner.
(MOON, 2016)

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2.4 Bank performance

The banking system’s balance sheet total increased by EUR 2.7 billion over the first ten months
of the year to stand at EUR 43.9 billion. Year-on-year growth in the balance sheet total has
strengthened this year, reaching 8.1% in October. Amid a sizeable increase in deposits by the
nonbanking sector and a decline in lending, banks are increasing their holdings of the most liquid
forms of asset, most notably claims against the central bank. Securities also continue to account
for a relatively large share of total holdings of assets (more than a fifth at system level). On the
liability side, compared with previous years, this year has seen an above-average increase in
deposits by the non-banking sector. (evrosistem, 2020)

The economic literature pays a great deal of attention to the performance of banks, expressed in
terms of competition, concentration, efficiency, productivity and profitability. This book
provides an all-embracing framework for the various existing theories in this area and illustrates
these theories with practical applications. Evaluating a broad field of research, the book
describes a profit maximizing bank and demonstrates how several widely-used models can be
fitted into this framework. The authors also present an overview of the current major trends in
banking and relate them to the assumptions of each model, thereby shedding light on the
relevance, timeliness and shelf life of the various models. The results include a set of
recommendations for a future research agenda. Offering a comprehensive analysis of bank
performance, this book is useful or all of those undertaking research, or interested, in areas such
as banking, competition, supervision, monetary policy and financial stability. (Brahmaiah*,
2021)

Commercial banks play important role to the economy of a country as it serves as an

intermediation between the households and the economy sector (finance). Therefore, the best
financial system is that which the mediator performs efficiently. Such a system limits, quantify,
gather and negotiate all operational risks and incite the savers to invest by offering them a
proportional payment to the scale of the risk incurred. The risk and return therefore can not be
the same with different economies and banks. (Bryan Enyih Ngu and Tsegaye Mesfin, 2021)

14
 Building a financial sector is vitally important. Sub-Saharan Africa has the world least
developed financial sectors. Institutions in coverage are limited and even banking sectors which
dominates among financial institutions are small. Although regulation is generally with
international norms and financial systems are sound, a history of forbearance has left a number
of weak banks many of them state-owned. Also while banks are on average profitable, their
assets are more concentrated and the return on asset is lower than elsewhere in the world.
(Mesfin, 2017)

Studying if this sector is outperforming its predicament is worth noting with the case Sub
Saharan Africa. Banking systems and banks are expanding within this region, they are becoming
more competitive. The share of banking assets held by the three largest banks is about one-tenth
higher in SSA than other low-income countries (in West Africa, East and Northern parts of Africa
and why not Asia). The small market size is a major factor contributing to concentration, given
the need for institutions to reach economies of scale (Bossone, Honohan, and Long, 2002). Some
of these big banks are, FirstRand Bank of South Africa, Bank Windhoek of Namibia, Barclays
Bank and ECOBANK which are represented in a majority of the SSA Countries. Banking sectors
in lowincome SSA are less efficient than global competitors. For all banks including foreign-
owned institutions, low efficiency leads to high overhead net interest margins that are higher in
lowincome SSA than in other low income countries (Mesfin, 2017)

The objective of risk management is to reduce the effects of different kinds of risks related to a
preselected domain to the level accepted by society. It may refer to numerous types of threats
caused by environment, technology, humans, organizations and politics. On the other hand it
involves all means available for humans, or in particular, for a risk management entity (person,
staff, organization). This thesis takes a fast look on Banking and Credit risk management and
further probes into bank risk exposure, assessment, management and control. An attempt will be
made to unfold the use of some risk management, evaluation and assessment tools, models, and
techniques. (Takang Felix Achou & Ntui Claudine Tenguh , 2008)

Performance refers to how well an organization is performing. Good performance is an indicator

of success and development of all organizations. Today best practices evaluate organizational
performance in terms of financial results, Products innovations, customer loyalty and people
performance helps ensure organizational goals are being achieved Armstrong (1987).

15
Performance is a major concern to all organizations. It‘s the level at which an organization is
placed in a particular industry various measures are used to measure it, ranging from gross sales,
profit, market share ,competitive advantage and customer rating. (ARAB, 2018)

2.5 Theoretical background

Theoretically, banks play important role to the economy of a country as it serves as an
intermediation between the households and the economy sector (finance). Therefore, the best
financial system is that which the mediator performs efficiently. Such a system limits, quantify,
gather and negotiate all operational risks and incite the savers to invest by offering them a
proportional payment to the scale of the risk incurred. The risk and return therefore can not be
the same with different economies and banks. (Bryan Enyih Ngu and Tsegaye Mesfin, 2021)

Establishing a financial sector is vitally important. Sub-Saharan Africa has the world least
developed financial sectors. Institutions in coverage are limited and even banking sectors which
dominates among financial institutions are small. Although regulation is generally with
international norms and financial systems are sound, a history of forbearance has left a number
of weak banks many of them state-owned. Also while banks are on average profitable, their
assets are more concentrated and the return on asset is lower than elsewhere in the world.
(Mesfin, 2017)

2.6 Summary of the literature

The literature review on the role of credit risk management on bank performance focuses on
three key factors: credit risk analysis, credit risk identification, and credit risk monitoring. The
overall findings suggest that these three factors have a positive impact on bank performance.

Credit risk analysis involves assessing the creditworthiness of borrowers and evaluating the
potential risks associated with lending. The literature indicates that effective credit risk analysis
enhances the bank's ability to make informed lending decisions, leading to a higher quality loan
portfolio. By accurately evaluating the creditworthiness of borrowers, banks can minimize the
probability of default and reduce potential losses. This ultimately improves the bank's financial
performance.

Credit risk identification refers to the process of identifying and categorizing various credit risks
faced by a bank. The literature suggests that a comprehensive and proactive approach to credit

16
risk identification allows banks to anticipate and address potential risks more effectively. By
identifying and quantifying different types of credit risks, such as default risk, concentration risk,
and liquidity risk, banks can implement appropriate risk mitigation strategies. This proactive risk
management approach contributes to improved bank performance by reducing unexpected losses
and enhancing overall risk management effectiveness.

Credit risk monitoring involves the ongoing surveillance of borrowers' credit profiles and the
monitoring of loan portfolios. The literature highlights the importance of continuous monitoring
to promptly detect any deterioration in borrowers' credit quality or changes in market conditions.
Effective credit risk monitoring enables banks to take timely actions, such as loan restructuring
or collateral adjustments, to mitigate potential losses. By closely monitoring credit risk indicators
and proactively managing credit exposures, banks can enhance their overall performance and
maintain a healthier loan portfolio.

In conclusion, the literature review indicates that credit risk analysis, credit risk identification,
and credit risk monitoring all play crucial roles in enhancing bank performance. These factors
help banks make informed lending decisions, anticipate and address potential risks, and
proactively manage credit exposures. By implementing effective credit risk management
practices, banks can reduce the probability of default, minimize losses, and maintain a healthier
loan portfolio, ultimately leading to improved financial performance.

17
 CHAPTER THREE

METHODOLOGY

3.0 INTRODUCTION
This chapter presents a detailed description of the research methodology which refers to the
procedure to be followed and discusses research design, research population, sample size,
sampling procedure, research instrument, validity and reliability of the instrument, data gathering
procedure, data analysis, ethical consideration and limitations of the study

3.1 RESEARCH DESIGN

This study follows Descriptive Research design. It is cross-sectional and quantitative. In
analytical research, the researcher will use facts or information, and analyze them to make a
critical evaluation of the material . It is a cross-sectional survey and the researcher will examine
many people at same time because most research projects undertaken for academic courses are
necessarily time constrained.

3.2 RESEARCH POPULATION

Population refers to the entire group of people that the researcher wishes to investigate (Sekaran,
2003). The study population will 70 employees working at Amal bank . The employees consist of

18
HRM Managers, heads of departments, Operational officers, Office staffs, and auditors These
are selected because they work under public private partnership.

3.3 Sample Size

From the target population of 70 employees, the researcher will select 60 respondents as the
sample size. The key respondents will comprise of 10 HRM managers, 15 head departments 10
operations officers, 20 Office Staffs 5 audits ; and. Table 3.1 shows the distribution of the
sampling respondents.

Table 0-1 Showing Categories of Respondents & Sample Size

Category of Respondents Population Sample size

HRM managers 11 10

Head departments 17 15

Operational officers 12 10

Office staffs 24 20

Audits 6 5

Total 70 60

The

19
researcher will use Slovene’s formula to select the respondents of the study from the population;
using the following formula

N
n= 1 + 2

N(e)

Where n is the required sample size, N is the target population size and e is the standard error or
level of significance, which is popularly known to be =0.05 or 5%. For this study, N = 70 and so
the sample size was calculated as follows;

70
n = 2 = 60
1 + 70 ( 0 . 05 )

3.4 Sampling Procedure

In this study, purposive sampling technique will be employed. According to Amin (2005),
purposive sampling is the type of sampling where the researcher uses his/her judgment or
common sense regarding participants from whom the information will be collected. The
researcher used purposive sampling in order to choose the respondents that he believes to have
the information concerning this study by using his own judgment, and then the researcher
distributed the questionnaire to them. Moreover, the researcher chose purposive sampling
because the researcher wanted to get the key informants of this study, for that reason; selecting
the respondents is more useful for this study than the representativeness of the sample.

3.5 RESEARCH INSTRUMENTS

The questionnaire of the study will be developed by the researcher to collect information about
the impact of credit risk management on bank performance at Mogadishu Somalia as a case
study of the Amal bank, so that this enabled to make the items in the questionnaire as valid as
possible.

3.6 Research quality

3.6.1 Reliability
Reliability is trustworthiness of a measuring instrument; it is the degree to which the instrument
consistently measures whatever it is meant to be measuring. The researcher conducts a pilot
study before the final collection of data. Data collection tools are pilot tested in order to ascertain
his ability to solicit the relevant responses to support the study. The justification for establishing

20
the reliability of the instruments is determined by the consistency, relevancy and clarity of the
instruments.
3.6.2 Validity

Validity is the ability to produce findings that are in agreement with theoretical or conceptual
values; in other words, to produce accurate results and to measure what is supposed to be
measured (Amin, 2005). There are different ways of testing the validity of a result, as going back
to the respondents and see if they agree or support the result. This is called face validity and
could happen in personal conversations or in groups. In this study the researcher uses that way of
testing the validity of the result.

3.7 DATA GATHERING PROCEDURES

After the researcher gets an approval from the academic, the authorities concerned attach letter to
the questionnaire confirming that the researchers are the students of Hormud University in
Mogadishu, Somalia and then questionnaire will be distributed to the selected respondents of
both the Seaport and Airport.

3.8 DATA ANALYSIS

This part addresses, processing and analysis. The data will be collected through descriptive
analysis. The data will be collected from the study area, edited, collated and tabulated. Data
will be collected through questionnaire and A-4-point liker scale will be used to measure the
output of each item answered by the respondent. SPSS statistical computer software will be
used to tabulate the data.

3.9 ETHICAL ISSUES

Under this, the respondents are informed that participation is voluntary so that they make
informed decision to participate or not. The researcher also goes with an introductory letter
Protecting respondents through data confidentiality also minimizes links between answers and
identifiers, to avoid putting respondents in trouble. In addition, the researcher avoids racial or
tribal remarks, which are not gender sensitive.

21
3.10 LIMITATION OF THE STUDY
The researchers will face number of problems including unwillingness of the respondents to
answer the research questions probably. Also the researcher faced language barriers, as some of
the respondents do not know English language so the researcher tried to translate them in their
local language.

QUESTIONNAIRE
Section One: Demographic Information
Please fill in the following information:

1. What is your gender?

o Male
o Female
2. What is your role in the company?
o Owner
o Manager
o Employee
o Other:
3. How many years has your company been in operation?
o Less than 1 year
o 1-5 years
o 6-10 years

22
 o More than 10 years
4. What is the size of your company (number of employees)?
o 1-10 employees
o 11-50 employees
o 51-100 employees
o More than 100 employees

Objective One: Risk identification Assessment

Please put tick in front of each question and rating, 1 = strongly agree 2 = Agree 3 = Disagree 4 =
strongly disagree
No Risk identification 1 2 3 4

1 Accurate identification and assessment of risks contribute to

improved financial performance for banks.

2 Timely identification of risks allows banks to implement

appropriate risk mitigation strategies, leading to improved
financial performance.
3 Banks that prioritize risk identification tend to have better overall
performance.

4 The utilization of advanced analytics and technology in risk

identification improves the accuracy and efficiency of risk
management, leading to enhanced bank performance.
5 Effective risk identification fosters transparency, accountability,
and trust, which positively affect bank performance.

Objective Two: Risk analysis Assessment

Please respond to the following statements by indicating the extent to which you agree or disagree as
per the given choices
No Risk analysis 1 2 3 4
1 The involvement of key stakeholders in the risk analysis process
enhances the quality of risk assessments and positively impacts bank
performance.
2 Comprehensive risk analysis helps banks prevent and mitigate fraud
and other financial irregularities, positively impacting their
performance.
3 The alignment of risk analysis with industry-specific factors and
market conditions enhances the effectiveness of risk management and
positively influences bank performance.

23
 4 Recognizing and prioritizing risk analysis as a crucial aspect of bank
operations is essential for optimizing their performance.

5 The integration of risk analysis findings into strategic planning

processes enables banks to align their goals with potential risks,
positively influencing their performance.

Objective Three: Risk monitoring

Please respond to the following statements by indicating the extent to which you agree or disagree as
per the given choices
No Risk monitoring 1 2 3 4 5

1 Regular and proactive risk monitoring contributes to improved

financial performance for banks.

2 Insufficient risk monitoring increases the probability of

undetected risks and vulnerabilities, which can negatively
impact bank performance.
3 The involvement of key stakeholders in the risk monitoring
process enhances the quality of risk assessments and positively
impacts bank performance.
4 Effective risk monitoring fosters transparency, accountability,
and trust, which positively affect bank performance.

5 Recognizing and prioritizing risk monitoring as a crucial aspect

of bank operations is essential for optimizing their
performance.

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COMMERCIAL BANKS IN Hargaisa Somalia.

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Ken Brown & Peter Moles . (2014). Credit Risk Management.

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Olusegun Adekunle, Samson Alalade & Taofeek Agbatogun. (2015). Credit Risk Management and
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-[Link]

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